Bankruptcy
Bankruptcy as Constitutional Property: Using Statutory Entitlement Theory To Abrogate State Sovereign Immunity
119 Yale L.J. 1568 (2010). In the decade following Seminole Tribe’s ruling that Article I is not a grant of authority to abrogate state sovereign immunity, scholars and courts overwhelmingly agreed that the Eleventh Amendment barred Congress from subjecting states to suit in bankruptcy proceedings. The Court has since backpedaled, holding in Katz that the states ceded their sovereign immunity when they ratified the Bankruptcy Clause. Katz, however, leaves much unsettled—including whether the ratifying states intended to cede their immunity defenses to suits seeking monetary damages. There is also reason to doubt Katz’s durability: beyond the serious flaws in its reasoning, Eleventh Amendment precedents perish and reanimate with the changing composition of the Court, and mere days after Katz was handed down, Justice O’Connor, who provided the fifth vote for the majority, was replaced by Justice Alito. The prospect that Katz may be overruled or cabined has caused anxiety for scholars and practioners who convincingly argue that the bankruptcy system cannot effectively function unless the states, like private creditors, are subject to the binding jurisdiction of bankruptcy tribunals. In an effort to insure against Katz’s rollback, this Note offers a new theory for how Congress could invoke its enforcement powers under Section 5 of the Fourteenth Amendment to authorize suits against the state for bankruptcy violations. Borrowing from the case law on statutory entitlements and procedural due process, the Note argues that like welfare, public education, and government employment, bankruptcy protections are property interests cognizable under the Due Process Clause. Because these property interests are conferred by the federal government and binding on the states, a state that tramples on an individual's bankruptcy rights in violation of federal law effects an unconstitutional deprivation of property without due process.
Antibankruptcy
119 Yale L.J. 648 (2010). In large Chapter 11 cases, the prototypical creditor is no longer a small player holding a claim much like everyone else’s, but rather a distressed debt professional advancing her own agenda. Secured creditors are more pervasive and enjoy much more control than they had even a decade ago. Moreover, financial innovation has dramatically increased the complexity of each investor’s position. As a result of these and other changes, the legal system now faces a challenge that is much like assembling a city block that has been broken up into many parcels. There exists an anticommons problem, a world in which ownership interests are fragmented and conflicting. This is quite at odds with the standard account of Chapter 11—that it solves a tragedy of the commons, the collective action problem that exists when general creditors share numerous dispersed, but otherwise similar, interests. This Article draws on the lessons of cooperative game theory to show how, in combination, these recent changes are toxic. They undermine the coalition formation process that is a foundational assumption of Chapter 11.
Applying the Absolute Priority Rule to Nonprofit Enterprises in Bankruptcy
118 Yale L.J. 1231 (2009).
The Case for Symmetry in Creditors' Rights
118 Yale L.J. 806 (2009). Using an original framework for evaluating bankruptcy rules, this Article casts doubt on the efficiency of legal arrangements that give some creditors an absolute advantage over others in the division of a debtor’s assets. Such arrangements, which I classify as asymmetrical, are widely used in the modern economy, and include the secured loan, American general partnership, and guaranty contract. In contrast, symmetrical arrangements, which include the corporation and common law partnership, confer no absolute advantage, because they give each creditor group a prior claim to a distinct debtor asset pool. I demonstrate that symmetrical arrangements produce lower debt appraisal costs, more efficient creditor monitoring, and speedier bankruptcy proceedings; they also are less conducive to exploitation of creditors such as tort victims who do not adjust to subordination of their claims. These results indicate that lawmakers could create social wealth by reforming asymmetrical arrangements to be symmetrical. The Article concludes by showing how symmetry is superior to previous proposals for reforming the secured loan.
Absolute Priority, Valuation Uncertainty, and the Reorganization Bargain
115 Yale L.J. 1930 (2006) In a Chapter 11 reorganization, senior creditors can insist on being paid in full before anyone junior to them receives anything. In practice, however, departures from "absolute priority" treatment are commonplace. Explaining these deviations has been a central preoccupation of reorganization scholars for decades. By the standard law-and-economics account, deviations from absolute priority arise because well-positioned insiders take advantage of cumbersome procedures and permissive judges. In this Essay, we suggest a different force is at work. Deviations from absolute priority are inevitable even in a world completely committed to respecting priority as long as the value of the reorganized enterprise is uncertain. Uncertainty accompanies any valuation procedure. Bargaining in corporate reorganizations takes place in the shadow of this uncertainty, and standard models of litigation and settlement show that valuation uncertainty alone can explain many of the departures from absolute priority in large corporate reorganizations. Even when rational and well-informed senior investors expect the absolute priority rule to be strictly enforced, they must take into account the uncertainty associated with any valuation. The possibility of an unexpectedly high appraisal may sometimes cause them to offer apparently out-of-the-money junior investors contingent interests in the reorganized business. The debate over absolute priority--the central principle of modern corporate reorganization law--has been misdirected for decades. It has failed to recognize that a substantive rule of absolute priority does not always lead to absolute priority outcomes. A coherent account of reorganization outcomes must take into account the junior investors' right to insist on an appraisal the result of which is uncertain. This uncertainty may by itself give that right option value. The most sensible path for reform is one that seeks to minimize this valuation uncertainty.
Bailing Out Congress: An Assessment and Defense of the Air Transportation Safety and System Stabilization Act of 2001
115 Yale L.J. 438 (2005) This Note provides the first detailed account of the conception, impact, and success of the Air Transportation Safety and System Stabilization Act (ATSSSA) of 2001, an $18 billion federal bailout of the airline industry passed eleven days after the terrorist attacks of September 11. The Note argues that, far from seeking to rehabilitate the commercial aviation industry, Congress hoped only to stabilize the airlines briefly and reassure the nation without severely distorting long-term market forces. In accomplishing this, the Note argues, the ATSSSA has established itself as a model of disaster-response legislation that can be turned to in the unfortunate event of future need.
The Unfinished Business of Bankruptcy Reform: A Proposal To Improve the Treatment of Support Creditors
115 Yale L.J. 247 (2005) Amid the controversy surrounding the recently enacted Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Act), few commentators have focused on the Act's provisions designed to enhance the protection of "support creditors"--a class of creditors consisting mostly of divorcées and single mothers who are owed child support, alimony, or other maintenance but whose former partners have declared bankruptcy. This Comment critiques the recent revisions to the Bankruptcy Code concerning support creditors and concludes that Congress must do more if it wishes to provide meaningful assistance to this vulnerable group. Proponents of the 2005 Act point to its assignment of higher priority status for matured support claims as evidence of the Act's progressive character. Yet this measure--which bumps support creditors higher up in the queue among other unsecured claimants during liquidation--has little practical value in the vast majority of cases, in which secured creditors' claims exceed the total value of the debtor's assets, leaving nothing for "priority" creditors of any kind. As one commentator quipped, the bankruptcy reform puts support creditors "first in line to receive nothing." A more important but less widely perceived consequence of the 2005 Act is that it indirectly jeopardizes support creditors by increasing competition for scarce postbankruptcy resources. Whereas support creditors once occupied a privileged position as one of the few classes of creditors with "nondischargeable" claims, the 2005 Act allows certain lenders, such as commercial creditors, to more easily pursue their claims beyond the point of bankruptcy, pitting these lenders against support creditors in an unstructured battle for the debtor's future income and assets. Because support creditors are far less adept than credit card companies at recovering debts in this unregulated environment, the 2005 Act effectively reduces support creditors' chances of receiving much-needed compensation. To remedy this problem, I suggest that Congress modify the Bankruptcy Code in three ways. First, Congress should create a statutory hierarchy among nondischargeable claims, with the claims of support creditors taking precedence over those of other unsecured creditors. By establishing a priority system for nondischargeable claims akin to that which currently operates when dividing up the bankruptcy estate, Congress would allay well-founded fears that credit card companies will crowd out vulnerable child support and alimony recipients in the race to recover against the debtor's postbankruptcy assets. Second, Congress should amend the Bankruptcy Code to include a "springing lien"--a device that automatically grants support creditors the right of first access to a debtor's future income. Such an innovation would prevent commercial lenders from leapfrogging ahead of support creditors by obtaining wage garnishments, a form of secured claim. Third, Congress should prevent all creditors with nondischargeable claims from claiming against the debtor's future income until any ongoing support-related obligations have been satisfied. This reform would ensure that before paying any outstanding debts--including support-related arrears--debtors would make allowance for their children's and former partners' current expenses.
More Equal than Others: Defending Property-Contract Parity in Bankruptcy
114 Yale L.J. 1099 (2005) Contracts create property; contractual rights and obligations are property. In bankruptcy, however, this aspect of nonbankruptcy law is often not recognized. This Note argues that bankruptcy law and policy should recognize the property in contract. This Note examines instances of inconsistency within the Bankruptcy Code and in bankruptcy courts' holdings to demonstrate how the acceptance of property-contract parity would lead to greater efficiency in prebankruptcy contracting, a stronger policy foundation for bankruptcy law, greater protection for valid party expectations, and less inequity between interested parties in bankruptcy proceedings.
A Dilution Mechanism for Valuing Corporations in Bankruptcy
111 Yale L.J. 83 (2001) This Article proposes a new mechanism for valuing firms in bankruptcy. Under the "senior dilution" mechanism, a court would dilute the reorganized stock issued to senior claimants by issuing additional shares to junior claimants until there was no excess demand for the stock at a price that would implement absolute priority. A "junior diluation" mechanism could also be implemented to provide a market test for proposed reorganization plans of junior claimants by having a court issue additional debt to senior claimants until there was no excess supply of the debt at a price that would implement absolute priority. We show that these mechanisms harnass the private information of the claimants and of third parties to produce distributions consistent with absolute priority. Dilution mechanisms can be superior to other information-harnassing devices (such as an option or auction approach) because they (1) are less susceptible to the problem of junior illiquidity than an option approach proposed by Lucian Bebchuk, (2) are less susceptible to the problem of market manipulation and may better allocate control premia than a partial float proposal by Mark Roe; and (3) may produce fewer transaction costs than a full auction approach proposed by Douglas Baird. Moreover, as a response to the Supreme Court's recent admonition in LaSalle that bankruptcy courts employ market tests more often when creditors dissent to a reorganization plan, the junior dilution mechanism provides a uniquely workable solution within the current statutory framework.
Currency Policies and Legal Development in Colonial New England
110 Yale L.J. 1303 (2001) This Article presents a new interpretation of the relation of law to economic development in colonial New England. Prior legal historical scholarship has focused almost exclusively on judicial decisionmaking, emphasizing judges' role in adapting the law in some optimal way to satisfy local preferences regarding the development of markets. This Article suggests that the relationship of law to economic development cannot be understood without consideration of the impact of colonial currency policies on the structure of the government, the nature of contractual relations, and the quantity of litigation. The seventeenth-century colonial economy can be characterized as plagued by an extreme scarcity of a circulating medium of exchange, in many periods compelling resort to barter. Currency scarcity reduced the possibility of market exchanges, prevented specialization, and suppressed market conditions. Colonial citizens developed means of surpassing pure barter, but the most central of these, such as book accounts--a system of keeping tabs within an insular community--reinforced localism. Currency scarcity also limited colonial governments' ability to impose monetary taxes with which to finance operations. The circulation of paper money therefore vastly increased the potential for a greater volume of exchanges, greater specialization, and market development, as well as colonial governments' ability to finance more expansive operations. Colonial citizens' reliance on paper money, however, had an additional effect: The value of contractual obligations became dependent upon the stability of colonial governments' currency policies. Colonial governments began issuing paper money, in the form of bills of credit, in the period from 1690 to 1710. Currency policies in New England in the first half of the eighteenth century were nevertheless highly unstable, leading variously to periods of severe inflation and periods of extreme monetary scarcity. Because fluctuations in the value of currency had a direct impact on the value of all preexisting contracts, periods of currency crises coincided with periods in which litigation vastly increased: On a widespread basis, debtors delayed repayment of their debts to benefit from periods of depreciating currency, forcing creditors to sue to claim the debt. In addition, periods of currency crisis were often times of recession, when debtors widely became unable to pay their debts, propelling creditors to sue to establish priority to debtors' assets. The correlation between periods of exponentially increased litigation and currency crisis suggests the need to reassess the role of the court system in promoting economic development. First, a focus on currency policy reveals that colonial courthouses were often occupied with problems that were entirely nonlocal in origin. Indeed, currency policies were the outcome of tense negotiations between colonial assemblies and the Board of Trade and Parliament in England. Second, the litigation crises attending currency crises reveal the weakness of characterizing judges as optimally adapting the law to satisfy the needs of local communities. Indeed, judges may have inadvertently worsened the litigation crises of the first half of the eighteenth century by enforcing the legal tender laws, which allowed debtors to repay debts in the nominal value of contracts, even after severe depreciation of the currency. Moreover, the absence of an organized system of priority-lending rules led to an increased volume of litigation during periods of recession.